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Kuwait becoming Islamic finance heavyweight

Following a flurry of activity earlier this month, Kuwait continues to prove itself as one of the dominant markets for Islamic financial services, spurred in large part by the expansion plans of Kuwait Finance House (KFH), which recently announced plans to bolster its regional market share and global network.

KFH has traditionally been one of the primary engines behind the growth of Kuwait's sharia-compliant financial market; however, its growth and expansion indicates an increasing maturity in Kuwait's sharia-compliant services sector, demonstrated by the push toward the regulation of Islamic bonds (sukuk) and the emergence of ever-stronger Islamic investment firms.
KFH, established in 1977, is the largest Islamic bank in Kuwait and the second-largest bank of any kind in the country. Given its prime position, the bank has historically driven the growth of the market. Earlier this week, in a bid to boost its domestic profile and further overseas expansion, KFH announced plans to raise its capital by 25%. The funds will be raised over the next three weeks through the offering of over 306 million shares, hoping to raise an estimated $1.06 billion.

In addition to the massive injection of capital, KFH-Bahrain, a subsidiary of KFH, recently unveiled plans to establish its own subsidiary in Amman, called KFH-Jordan. According to KFH chairman and managing director, Bader al-Mukhaizeem, KFH-Jordan will increase the reach of KFH's worldwide network, focusing not only on investment banking but also on private equity and tourism investments.

KFH also recently unveiled an Islamic banking research office in Malaysia, Islamic Banking Economics and Investment Research. The office will focus on analysis of sharia-compliant services and investments. KFH-Malaysia managing director K Salman Younis says that the launch of the research office highlights the growing centrality of Islamic services to the global financial architecture.

The growth of KFH operations at home and overseas underlines the increasing development of Kuwait's Islamic financial sector. Speaking with Oxford Business Group (OBG), local Islamic finance experts said that KFH's 35.4% growth in assets last year is closely in line with the 38% rise in assets of the country's three leading Islamic banks - and nearly six times the growth of conventional banks. This is by no means a phenomenon limited to Kuwait alone. US-based ratings agency Standard & Poor's recently stated that worldwide assets in the Islamic finance sector have grown to over $500 billion, at a rate of over 10% over the past decade.

However, Kuwait has been taking a number of steps to strengthen its local sharia-compliant institutions, including gradually moving toward a new regulatory framework for sukuk. In conversations with OBG, industry insiders explained that due to a lack of appropriate legal mechanisms, Islamic finance companies are not allowed to issue sukuk in Kuwait, which forces Kuwaiti companies to work through other markets, such as Bahrain. Given the massive increase in sukuk issuance worldwide, pegged at nearly $17 billion (in the Gulf alone, the growth rate since 2001 has been nearly 45%), Kuwait's financiers are keenly aware of the need for proper rules regulating sukuk.

Issam al-Tawari, vice-chairman and CEO of Rasameel Structured Finance, said, "The market needs to be aware with the importance and structure of sukuk. There are no legal principles to govern sukuk issuance."

The governor of the Central Bank of Kuwait (CBK), Sheikh Salem Abdulaziz Al Sabah, said earlier this week that regulations are needed, saying that the CBK is "keen to provide a legal system to regulate the issuance of sukuk, especially in light of growing demand. We are optimistic a solution will soon be found."

Another testament to the clout of Kuwait's Islamic financial sector is the increasingly global reach of its sharia-compliant companies. KFH, for example, in addition to its Turkey, Malaysia and Bahrain ventures, recently established a subsidiary with a pair of Chinese firms to explore real estate investments in the Chongqing province of central China. In a more high-profile move, Investment Dar, one of Kuwait's biggest Islamic investment companies, recently funded a takeover of British luxury carmaker Aston Martin to the tune of $925 million.

According to Standard & Poor's recent Gulf Co-operation Council Credit Survey, an increasing number of Islamic banks are also taking steps towards greater transparency and stronger governance structures. Emmanuel Volland, an analyst at Standard and Poor's, said there are "increasing numbers of Islamic banks coming forward to be rated", underlining the growth in the market and the shift towards a greater awareness of sharia-compliant financial services.


Jason J. Nash is Head of Research at the Oxford Business Group
(www.oxfordbusinessgroup.com)

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